ASIA HAND Cracks appear in Lee's mantle By Shawn W Crispin
While a populist backlash against perceived corrupt bankers and financiers
mounts in the United States, all is comparatively calm in financial hub
Singapore, where the state and finance sector are virtually one and the same.
Yet some analysts wonder whether the deepening downturn could eventually spark
popular calls for political change to the People's Action Party (PAP)-led
government, similar to the mass mobilizations that ousted Indonesia's and
nearly toppled Malaysia's entrenched authoritarian regimes amid the 1997-98
Asian financial crisis.
Prime Minister Lee Hsien Loong faces Singapore's worst economic crisis since it
achieved independence in 1965 and
some analysts believe his handling of the downturn will determine largely his
future staying power as premier once his influential 85-year-old father,
Minister Mentor and national founder Lee Kuan Yew, eventually passes from the
scene.
The senior Lee warned earlier this month that gross domestic product (GDP)
growth could contract by as much as 8% this year. As one of Asia's most open
economies, where exports of goods and services last year accounted for around
145% of GDP, Singapore has been especially hard hit by the collapse in global
trade. Investment bank Credit Suisse estimates every 10% lost in goods and
services exports will through first round effects shave 7.2% off Singapore's
GDP.
But it's Lee's government's financial management, particularly its role in
running the Government of Singapore Investment Corp (GIC), Temasek Holdings
PTE, and, perhaps most crucially, the Central Provident Fund, which is drawing
more critical attention. Earlier this month the Straits Times reported that
GIC's assets, often roughly estimated at US$300 billion, had fallen by around
25% off their peak of last year.
The state-controlled newspaper quoted the senior Lee saying that GIC had
invested "too early" when it took stakes in early 2008 in Swiss investment bank
UBS and now diminished US banking giant Citibank. Until a recent preferred to
common stock swap, GIC had lost 80% on its Citibank gambit.
Singaporean eyebrows also rose earlier this year when Temasek chief executive
officer Ho Ching, the wife of Prime Minister Lee, announced she would step down
from her post in October and be replaced with an American national. Temasek
executives have said that her resignation is not related to the investment
company's recent financial performance, which in historical terms has tanked.
The sovereign fund shed 31% of assets' value between April and November 2008,
driving its portfolio down to US$127 billion, according to a Ministry of
Finance report made to parliament. Some analysts expect even worse when the
sovereign fund announces its total annual results, expected in the weeks ahead.
The senior Lee was quoted saying in the local press that there was "no equal"
inside Temasek to the outside Australian national candidate appointed to the
post, but later backtracked on the comment.
The mentor minister's flip-flop about Temasek's top management capabilities
struck some as odd, considering the sovereign fund had until recently claimed
to have earned an average 18% in total annual shareholder returns. It's notable
in retrospect that the International Monetary Fund (IMF), in a 2006 report,
inquired Temasek managers whether they "took into account the impact of its
investment on the overall economy's exposure to sectors and countries".
Temasek officials responded that the outward expansion was done "cautiously and
selectively, overseen by an independent board". Authorities also told the IMF
then that "disclosing further information on GIC's operations and financial
position was difficult because of strategic reasons, but underscored that such
investments were largely in liquid assets and undertaken with sufficient
internal oversight".
The IMF said in an August 2008 report that GIC's and Temasek's operations "do
not appear to undercut the formulation or conduct of domestic policies", though
this assessment was made before government officials revealed the extent of
their recent losses.
Pension questions
Opposition politician and political scientist James Gomez, for one, believes
that the mounting crisis has exposed flaws in the government's economic
management. He says that while Temasek's and GIC's losses have not overtly
affected the day-to-day lives of most Singaporeans, they could eventually
impact on the Central Provident Fund (CPF), a state-run compulsory social
security program.
The CPF board has consistently said it only invests funds in "risk-free"
government bonds and bank deposits, but both opposition and PAP politicians
have contradicted those claims. Opposition politicians, including Low Thia
Khiang, have questioned whether the funds paid into the CPF actually provide a
de facto cheap source of finance for GIC in particular to invest abroad.
GIC officially acknowledges that it invests overseas some of the proceeds
raised from government bonds. However, the government does not publicly release
information on assets held abroad or data on the position of the consolidated
public sector, according to the IMF. That's historically raised criticisms that
could intensify in the months ahead as the economy weakens. Opposition MP Low
was quoted in the Straits Times in September 2007 asking in parliament whether
the "government short-changes Singaporeans by giving CPF members 3.5% of the
interest rate while the GIC makes 9% and pockets the balance of 5.5%".
Gomez says that because there is no clear evidence to show that CPF funds have
disappeared with GIC's and Temasek's recent losses, there has not yet been a
public reaction against the two investment funds' management. However, he
contends there is a growing "disquiet" about the various mechanisms the
government has since 2007 put in place to delay CPF disbursements to the
population, including a rise in the minimum retirement age.
Those measures are a reflection, some believe, of the CPF's weak financial
position, which analysts say has been hampered by a pro-business government
policy in recent years to substantially reduce employers' payments into the
scheme. The IMF said in 2006 that "steps are needed to increase income
replacement rates for retirees relying on their [CPF] savings". It's not
apparent - three years later and amid the country's worst ever economic crisis
- that those recommended steps have been taken.
There are other areas of potential popular agitation, including a nagging
perception, expressed on blogs and among the political opposition, that top
government officials are grossly overpaid. In April 2007, ministers received a
60% pay hike, bumping their pay to an average of US$1.2 million per year. Prime
Minister Lee's salary jumped at the time to the Singapore dollar equivalent of
US$2 million. The official pay hikes were justified by a compensation system
created in 1994 by the senior Lee, then premier, that pegged top officials'
salaries to what they might earn at the same level in the private sector.
Then, the senior Lee strongly defended the hefty pay hikes, warning the
previous month that without them "your jobs will be in peril, your security at
risk and our women will become maids in other people's countries". With the
global downturn, at least the first of those dire warnings has come a cropper
for many Singaporeans, though there are no indications yet government
ministers' salaries will be cut back in line with rising global discontent over
perceived corruption in top level corporate compensation packages.
Prime Minister Lee has responded to the mounting economic crisis through
vigorous fiscal pump priming. The government's 2009 budget entails fiscal
measures, including a heavy dose of off-budget loan guarantees, which amount to
8% of GDP, the largest such percentage in Asia. Underscoring the potential
depth of Singapore's crisis, the fiscal package is nearly twice the amount as a
percentage of GDP the government mobilized in the wake of the 1997-98 Asian
financial crisis. Half of the fiscal cash is expected to be injected into the
economy this year, according to Credit Suisse.
Whether this will be enough to keep rising social discontent from morphing into
calls for political change and greater government transparency is still
unclear. Opposition politician Gomez contends that most Singaporeans are "too
fearful too express their desire for political change" in light of the
government's notoriously harsh handling of its critics, including the use of
crippling defamation suits to bankrupt opposition politicians.
He believes that the government's fiscal strategy amounts to "cash handouts to
mitigate criticism", which, he concedes could still work in Singapore's
materialistic society. But Singapore's wealth has recently greatly diminished,
perhaps more than many realize, and as the global economic crisis bites deeper
at home, it's possible that desperate Singaporeans look to pin the blame on
Lee's government.
Shawn W Crispin is Asia Times Online's Southeast Asia Editor. He may be
reached at swcrispin@atimes.com.
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